ULTRALIFE CORPORATION AND SUBSIDIARIES

INDEX

Item 1. CONSOLIDATED FINANCIAL STATEMENTS

ULTRALIFE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

The accompanying notes are an integral part of these consolidated financial statements.

The accompanying notes are an integral part of these consolidated financial statements.

ULTRALIFE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts inIn thousands– except share and per share amounts)

(unaudited)(Unaudited)

The accompanying unaudited Consolidated Financial Statementsconsolidated financial statements of Ultralife Corporation and its subsidiaries (the “Company” or “Ultralife”) and its subsidiaries have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotesnotes for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals and adjustments) considered necessary for a fair presentation of the Consolidated Financial Statementsconsolidated financial statements have been included. Results for interim periods should not be considered indicative of results to be expected for a full year. Reference should be made to the Consolidated Financial Statementsconsolidated financial statements and related notes thereto contained in our Form 10-K for the year ended December 31, 2016.2022.

The December 31, 20162022 consolidated balance sheet datainformation referenced herein was derived from audited financial statements but does not include all disclosures required by GAAP.

Our monthly closing scheduleCertain items previously reported in specific financial statement captions have been reclassified to conform to the current presentation.

Significant Accounting Policies

During the quarter ended June 30, 2023, in consultation with third party experts, the Company completed an analysis to determine and verify its eligibility for the Employee Retention Credit (“ERC”), which is a 4/4/5 weekly-based cycle for each fiscal quarter, as opposedrefundable tax credit against certain employment taxes under Section 2301 of the Coronavirus Aid, Relief, and Economic Security Act of 2020 (“CARES Act”) and the American Rescue Plan of 2021, and filed the necessary amended payroll tax forms with the Internal Revenue Service to claim a calendar month-based cycle for each fiscal quarter. While the actual datesrefund for the quarter-ends will change slightly each year, we believe that there are not any material differences when making quarterly comparisons.credit.  The ERC refund receivable of $1,544 is included in prepaid expenses and other current assets on our consolidated balance sheet as of June 30, 2023, and the benefit is recognized as other income (expense) on our consolidated statement of income for the three and six-month periods ended June 30, 2023.

On January 13, 2016, Ultralife UK Limited (the “Merger Subsidiary”), a U.K. corporation and a wholly-owned subsidiary of Ultralife Corporation (the “Company”), completed the acquisition of all of the outstanding ordinary shares of Accutronics Limited (“Accutronics”), a U.K. corporation based in Newcastle-under-Lyme, U.K., from Intrinsic Equity Limited, Catapult Growth Fund Limited Partnership, MJF Pension Trustees Limited, Robert Andrew Phillips and Michael Allen (collectively, the “Sellers”). There are no material relationships between the Company or Merger Subsidiary and any of the Sellers, other than pertaining to this acquisition. Accutronics is a leading independent designer and manufacturer of smart batteries and charger systems for high-performance, feature-laden portable and handheld electronic devices and is classified in the Battery & Energy Products segment. The acquisition of Accutronics advances our strategy of commercial revenue diversification and expands our geographic reach within European OEM’s.  With industry experts predicting mid-to-high single digit growth through 2020 in the global medical batteries market, this strategic investment positions Ultralife well for further penetration of and growing revenue streams from an attractive commercial market.

The acquisition was completed pursuant toIn June 2016, the terms of the Share Purchase Agreement dated January 13, 2016 by and among the Merger Subsidiary and the Sellers. The Merger Subsidiary paid at the time of closing an aggregate purchase price of £7,575 ($10,976) in cash, and in exchange the Merger Subsidiary received all of the outstanding shares of Accutronics ordinary stock. Monies to fund the purchase price were advanced to the Merger Subsidiary from the Company’s general corporate funds.

The purchase price was subject to adjustment based on the difference between actual and estimated amounts of working capital of Accutronics as well as the amount of net cash of Accutronics. The adjustment resulted in a final payment to the Sellers in the amount of £133 on February 24, 2016, bringing the total aggregate purchase price to £7,708 ($11,161).

The purchase price allocation was determined in accordance with the accounting treatment of a business combination in Financial Accounting Standards Board (“FASB”) ASC Topic 805, Business Combinations. Under the guidance, the fair valueissued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326) – Measurement of the consideration was determined and theCredit Losses on Financial Instruments”, which requires entities to measure all expected credit losses for financial assets acquired and liabilities assumed have been recorded at their fair valuesheld at the reporting date ofbased on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the acquisition. The excess of the consideration paid over the estimated fair values has been recorded as goodwill.

The final allocation of purchase priceexisting incurred loss model and is applicable to the measurement of credit losses on financial assets acquired and liabilities assumedmeasured at amortized cost. This guidance is presented in the table below. Management is responsibleeffective for determining the fair value of the tangible and intangible assets acquired and liabilities assumed as of the date of acquisition. Management considered a number of factors, including reference to an analysis performed under FASB ASC Topic 805 solely for the purpose of allocating the purchase price to the assets acquired and liabilities assumed. The Company’s estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain. These valuations require the use of management’s assumptions, which would not reflect unanticipated events and circumstances that may occur.

The goodwill included in the Company’s purchase price allocation presented above represents the value of Accutronics assembled and trained workforce, the incremental value that Accutronics engineering and technology will bring to the Company and the revenue growth expected to occur over time attributable to increased market penetration from future new products and customers. The goodwill acquired in connection with the acquisition is not deductible for income tax purposes.

The identifiable intangible assets included in the Company’s purchase price allocation represent customer contracts and relationships of $2,821, intellectual property of $1,132 and trade name of $421 that are amortized straight-line over a period ranging from 10 to 15 years.

During the nine-month period ended September 25, 2016, direct acquisition costs of $251 and increased cost of sales related to purchase accounting adjustments of $96 for inventory acquired were recorded in the Company’s Consolidated Statement of Income and Comprehensive Income. Accutronics contributed revenue of $7,551 and an operating loss of $61 during the nine-month period ended September 25, 2016 reflecting the purchase accounting adjustments and non-recurring costs directly related to the acquisition.

Set forth below are the unaudited pro forma results of the Company for the nine-month period ended September 25, 2016, as if the acquisition occurred asfiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The adoption of January 1, 2015. The unaudited pro forma results for the nine months ended September 25, 2016 exclude direct acquisition costs of $251 and cost of sales of $96 related to the purchasethis new accounting adjustments for inventory acquired. The operating results of Accutronics werestandard did not have a material for the period from January 1, 2016 to the acquisition date.impact on our consolidated financial statements.

The unaudited pro forma results do not reflect the realization of any expected cost savings or other synergies from the acquisition of Accutronics as a result of restructuring activities, other cost savings initiatives or sales synergies following the completion of the business combination. Accordingly, these unaudited pro forma results are presented for informational purposes only and not necessarily indicative of what the actual results of operations of the combined Company would have been if the acquisition had occurred at the beginning of the 2015 period presented, nor are they indicative of future results of operations.

On April 28, 2014, the Company’s BoardDecember 13, 2021, Ultralife, Southwest Electronic Energy Corporation, a Texas corporation and wholly owned subsidiary of Directors approvedUltralife (“SWE”), CLB, INC., a share repurchase program (the “Share Repurchase Program”) which became effective on May 1, 2014Texas corporation and authorized the Company to repurchase up to 1.8 million shareswholly owned subsidiary of its outstanding common stock overSWE (“CLB”), Ultralife Excell Holding Corp., a period not to exceed twelve months. The Share Repurchase Program was extended through June 2, 2016,Delaware corporation and the maximum numberwholly owned subsidiary of shares authorized to be repurchased under the program was increased to 3.4 million shares.  Share repurchases under this program were made in accordance with SEC Rule 10b-18 usingUltralife (“UEHC”), Ultralife Canada Holding Corp., a varietyDelaware corporation and wholly owned subsidiary of methods, which included open market purchasesUEHC (“UCHC”), and block trades in compliance with applicable insider tradingExcell Battery Corporation USA, a Texas corporation and other securities laws and regulations. With the exceptionwholly owned subsidiary of repurchases made during stock trading black-out periods under 10b5-1 Plans, the timing, manner, price and amount of any repurchases were determined at the Company’s discretion. The Share Repurchase Program expired on June 2, 2016 and did not obligate the Company to repurchase any specific number of shares.  From the inception of the Share Repurchase Program on May 1, 2014 through its expiration on June 2, 2016, the Company repurchased 2,592,095 shares for an aggregate cost (excluding fees and commissions) of $10,480.  During the nine-month period ended September 25, 2016, the Company repurchased 149,904 shares under this program for a total cost (excluding fees and commissions) of $603.

Inventories are stated at the lower of cost or market with cost determined under the first-in, first-out (FIFO) method. The composition of net inventories was:

Major classes of property, equipment and improvements consisted of the following:

Depreciation expense for property, equipment and improvements wasUEHC (“Excell USA”), as follows:

a. Goodwill

The following table summarizes the goodwill activity by segment for the nine-month periods ended October 1, 2017 and September 25, 2016:

b. Intangible Assets

The composition of intangible assets was:

Amortization expense for intangible assets was as follows:

The change in the cost value of total intangible assets from December 31, 2016 to October 1, 2017 is a result of the effect of foreign currency translations.

On May 31, 2017, Ultralife Corporationborrowers, entered into a Credit and Securitythe Second Amendment Agreement (the “Credit Agreement”) and related security agreements with KeyBank National Association (“KeyBank” or the “Bank”), as lender and administrative agent, to establish a $30,000 senior secured, cash flow-based, revolving credit facility that includes a $1,500 letter of credit subfacilityamend the Credit and Security Agreement dated May 31, 2017 as amended by the First Amendment Agreement by and among Ultralife, SWE, CLB and KeyBank dated May 1, 2019 (the “Credit Facility”Agreement”). TheOn November 28, 2022, Ultralife, SWE, CLB, UEHC, UCHC, Excell USA, and Excell Battery Canada ULC, a British Columbia unlimited liability corporation and wholly owned subsidiary of UCHC (“Excell Canada”), entered into that certain Third Amendment Agreement with KeyBank, to further amend the Credit Agreement provides thatto, among other things, facilitate the Credit Facility may be increased with the Bank’s concurrence to $50,000 prior to the last six monthsjoinder of the term and is scheduled to expire on May 30, 2020. The Credit Facility replaces the Company’s asset-based revolving credit facility with PNC Bank National Association which expired in accordance with its terms on May 24, 2017 (the “Prior Credit Agreement”).

The Credit Facility provides the Company with an aggregate of up to $30,000 of loan and letter of credit availability determined based onExcell Canada as a borrowing base formula. The Company may use advancesguarantor under the Credit Facility for general working capital purposes, to reimburse drawings under letters of creditAgreement and to fund capital expendituresreplace the LIBOR benchmark thereunder with SOFR (the “Third Amendment Agreement”, and acquisitions, all subject totogether with the terms ofSecond Amendment Agreement and the Credit Agreement. The Company had no amounts drawn underAgreement, the Prior“Amended Credit Agreement at the time of its expiration and has not borrowed under the Credit Facility.Agreement”).

Interest will accrueThe Amended Credit Agreement, among other things, provides for a 5-year, $10,000 senior secured term loan (the “Term Loan Facility”) and extends the term of the $30,000 senior secured revolving credit facility (the “Revolving Credit Facility”, and together with the Term Loan Facility, the “Amended Credit Facilities”) through May 30, 2025. Up to six months prior to May 30, 2025, the Revolving Credit Facility may be increased to $50,000 with the Bank’s concurrence.

As of June 30, 2023, the Company had $7,167 outstanding principal on the Term Loan Facility, $2,000 of which is included in current portion of long-term debt on the balance sheet, and $17,630 outstanding indebtednesson the Revolving Credit Facility. As of June 30, 2023, total unamortized debt issuance costs of $155, including placement, renewal and legal fees associated with the Amended Credit Agreement, are classified as a reduction of long-term debt on the balance sheet. Debt issuance costs are amortized to interest expense over the term of the Amended Credit Facilities.

The remaining availability under the Revolving Credit Agreement at the Overnight LIBOR Rate plus the applicable margin, or at the Base Rate plus the applicable margin, as selected by the Company. During the period beginning May 31, 2017 and ending April 1, 2018, the applicable margin for Overnight LIBOR LoansFacility is 185 basis points, the applicable margin for Base Rate Loans is negative 50 basis points and applicable margin for the Unused Fee is 20 basis points. Beginning April 2, 2018 and thereafter, the applicable margins will be determinedsubject to certain borrowing base limits based on the chart below.trade receivables and inventories.

The Company must pay a feeis required to repay the borrowings under the Term Loan Facility in equal consecutive monthly payments commencing on its unused availability equalFebruary 1, 2022, in arrears, together with applicable interest. All unpaid principal and accrued and unpaid interest with respect to the applicable margin forTerm Loan Facility is due and payable in full on January 1, 2027. All unpaid principal and accrued and unpaid interest with respect to the Unused FeeRevolving Credit Facility is due and customary letter of credit fees.payable in full on May 30, 2025. The Company may voluntarily prepay principal amounts outstanding at any time subject to certain restrictions.

In addition to the customary affirmative and negative covenants, the Company must maintain a fixed charge coverage ratioConsolidated Senior Leverage Ratio, as defined in the Amended Credit Agreement, of 1.15equal to or less than 3.5 to 1.0 tested each fiscal quarter for the trailing four fiscal quarters ending December 31, 2022 and a minimum tangible net worth of $40,000, tested as ofMarch 31, 2023, and equal to or less than 3.0 to 1.0 for the end of each calendar year.fiscal quarters ending June 30, 2023 and thereafter. The Company was in full compliance with its covenants under the Amended Credit Agreement as of October 1, 2017.June 30, 2023.

Any outstanding borrowings must be repaid upon expirationBorrowings under the Amended Credit Facilities are secured by substantially all the assets of the termCompany and its subsidiaries.

Upon the effectiveness of the Third Amendment Agreement, interest accrues on outstanding indebtedness under the Amended Credit Facilities at the Daily Simple SOFR Rate, plus an index spread adjustment of 0.10%, plus the applicable margin. The applicable margin ranges from 185 to 215 basis points and is determined based on the Company’s senior leverage ratio.

The Company must pay a fee of 0.15% to 0.25% based on the average daily unused availability under the Revolving Credit Facility.

Payments must be made duringby the termCompany to the extent outstanding borrowings exceed the maximum amount then permitted to be drawn as borrowings underon the Amended Credit FacilityFacilities and from the proceeds of certain transactions. Upon the occurrence of an event of default, the outstanding obligations of the Company under the Credit Facility may be accelerated, in additionand the Bank will have other customary remedies including resort to the other remedies availablesecurity interest the Company provided to the BankBank.

Basic earnings (loss) per share (“EPS”) is computed by dividing net income (loss) attributable to Ultralife by the weighted average shares outstanding during the period. Diluted EPS includes the dilutive effect of securities, if any, and is calculated using the treasury stock method.

For the three-month period ended June 30, 2023, there were 4,166 outstanding stock options and 2,500 unvested restricted stock awards included in the calculation of diluted weighted average shares outstanding, as such securities were dilutive, resulting in 2,334 potential common shares included in the calculation of diluted EPS. For the comparable three-month period ended June 30, 2022, 135,163 outstanding stock options and unvested 5,000 restricted stock awards were included in the calculation of diluted EPS, resulting in 20,352 potential common shares included in the calculation of diluted EPS. There were 1,289,862 and 1,073,077 outstanding stock options for the three-month periods ended June 30, 2023 and 2022, respectively, not included in EPS as the effect would be anti-dilutive.

For the six-month period ended June 30, 2023, there were no outstanding stock options and 2,500 unvested restricted stock awards included in the calculation of diluted weighted average shares outstanding, resulting in 2,157 potential common shares included in the calculation of diluted EPS. For the comparable six-month period ended June 30, 2022, 135,163 outstanding stock options and 5,000 unvested restricted stock awards were included in the calculation of diluted EPS, resulting in 24,751 potential common shares included in the calculation of diluted EPS. There were 1,294,028 and 1,073,077 outstanding stock options for the six-month periods ended June 30, 2023 and 2022, respectively, not included in EPS as the effect would be anti-dilutive.

Fair Value Measurements and Disclosures

The fair value of financial instruments approximated their carrying values at June 30, 2023 and December 31, 2022. The fair value of cash, accounts receivable, accounts payable, accrued liabilities, and the current portion of long-term debt approximates carrying value due to the short-term nature of these instruments.

Cash

The composition of the Company’s cash was as follows:

Major classes of property, plant and equipment consisted of the Credit Agreement. The Credit Facility is secured by substantially all the assets of the Company.following:

Depreciation expense for property, plant and equipment was as follows:

Goodwill

The following table summarizes the goodwill activity by segment for the six-month period ended June 30, 2023.

Other Intangible Assets, Net

The composition of other intangible assets was: